Kass: QE 2 Is a Con Game

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As Halloween, the midterm elections and quantitative wheezing approach over the next week, some strange and spooky developments have occurred:

    * Interest rates rise. Interest rates are rising despite the intended opposite effect of QE 2 to be announced next Wednesday. (The yield on the 10-year U.S. note, at 2.68%, has risen by about 30 basis points recently and has retraced the entire yield decline since Bernanke's introduction of the concept of QE 2 at the Jackson Hole meeting in August.)

    * As does inflation rise. While the Fed is focused on deflation, inflationary pressures are mounting. (I call this screwflation.) While this is one of the primary stated objectives of QE 2, the unintended consequence of rising input costs and rising prices of food, copper (up 16%), gasoline (up 13%) and so on is to reduce global growth, pressure corporate margins and squeeze consumers' real incomes further. (And, as Sir Larry Kudlow teaches us, the price of gold (up 8%) is the precursor to worrisome inflationary trends.)

    * A rapid U.S. dollar drop. Sliding 10% against the euro will surely help exports, but further quick declines could cause tensions with our trading partners.

    * Chaos in housing. Mortgage-gate has trumped the impact of unprecedented lower mortgage rates on the slope of the housing recovery. (Rep and warranty issues have served to create market disequilibrium and have put a dagger into the heart of housing and the availability of mortgage credit.)

    * The long tail of the last credit cycle remains an ever present risk. Europe's debt woes continue. As an example, spreads on Greek bonds have risen by nearly 50 basis points overnight.

    * Quantitative easing lite. A positive outcome from QE 2, viewed as the sine qua non by bullish investors, is starting to look increasingly smaller than the Tepper camp desires or expects. Again, more shucks and aww, not the shock and awe of the first round of quantitative easing.

On the last bullet point, QE 2 has become the panacea for not only our economic ills but nearly everything else. Yet, strangely, no improvements in the jobs picture or in the fiscal imbalances (local, state and federal) have been yet seen.

The coup de grace for me was in watching the breathless commentary from one of the panelists on last night's airing of CNBC's "Fast Money," when my friend/buddy/pal, Brian Kelly, extolled the game-changing virtues of quantitative easing (on housing, on the economy, on corporate financing and, yes, on stock prices) after previously having been emphatically bearish at the July market lows (based, in part, on the structural imbalances of the domestic economy and the long tail of the past credit crisis). Here is the tape from last night.

It is important to recognize that Brian and the bullish cabal have been fully correct in interpreting QE 2 as an engine to higher stock prices.

Jim Cramer mentioned yesterday that there are many reasons for being bullish on equities, but, as I have expressed over the past month, I don't see quantitative wheezing as one of them. And, in light of the mixed economic releases since the market rallied in response to expectations of QE 2, I can only conclude that the confidence in the benefits of further monetary stimulation has been chiefly responsible for the rise in equities.

From my perch, it seems to me the logic regarding the likely efficacy and benefits of quantitative easing has an increasingly weakened foundation, while the unintended consequences loom ever larger. I would sell stocks in the anticipation of QE 2, as I remain of the view that the S&P 500 is in the process of making a top for the rest of the year.